Iraq Debts Add Up to Trouble
Economists say Bush administration officials are wrong to assume that
petroleum revenue will pay for postwar reconstruction.
By Warren Vieth
Times Staff Writer
April 4, 2003
WASHINGTON -- To hear some Bush administration officials tell it, the
reconstruction of Iraq will largely pay for itself, thanks to a postwar
gusher of petroleum revenue.
"The one thing that is certain is Iraq is a wealthy nation," White House
Press Secretary Ari Fleischer said.
A look at the national balance sheet tells a different story.
Iraq will emerge from the war a financial shambles, many economists say,
with a debt load bigger than that of Argentina, a cash flow crunch
rivaling those of Third World countries, a mountain of unresolved
compensation claims, a shaky currency, high unemployment, galloping
inflation and a crumbling infrastructure expected to sustain more damage
before the shooting stops.
And the more oil Iraq produces to pump up its earnings, the more likely it
becomes that prices will fall, leaving it no better off than before.
"Clearly, it's a basket case," said Dean Baker, co-director of the liberal
Center for Economic and Policy Research in Washington. "Once you start
talking about it, you see what an impossible situation it is. I don't
think the Bush administration is anxious to have that conversation."
Bathsheba Crocker, director of the Post-War Reconstruction Project at the
centrist Center for Strategic & International Studies, said Iraq's oil
money is not the panacea many Bush officials seem to think it is.
"It's unreasonable to think that oil is going to finance all of the needs
of the country," Crocker said. "All told, there's just not enough money to
Baker and Crocker are among a small but vocal contingent of nongovernment
economists and foreign policy analysts who say it is time for the United
States to stop pretending that life in Iraq after the war will resemble
something out of "The Beverly Hillbillies."
The reality, they say, will look more like Chapter 11. In their view, the
only satisfactory solution is an international aid and debt relief program
as ambitious as the Marshall Plan that helped Europe recover from the
ravages of World War II.
"Unless debt and reparations are dealt with properly, Iraq is basically
bankrupt," said Rubar Sandi, an Iraqi American investment banker who is
pressing administration officials to embrace a major debt relief
"I know they might not like what I'm saying," said Sandi, whose
Washington-based Corporate Bank Business Group has investments in several
developing countries. "But I am a businessman, and it's simple
Although the debt write-offs would be spread far and wide, some of the
biggest hits would be taken by countries such as Russia and France, which
supplied Saddam Hussein with military gear and other goods before the 1991
Persian Gulf War and have been staunch opponents of the current conflict.
Even then, experts say, Iraq's oil revenue probably would fall short of
what is needed to pay for postwar reconstruction, and much of the
immediate shortfall would wind up being financed by U.S. Treasury bonds.
So far, the administration seems not to have noticed. Deputy Defense
Secretary Paul Wolfowitz told Congress last week that Iraq would be able
to pick up much of the tab for postwar rebuilding.
"We're dealing with a country that can really finance its own
reconstruction relatively soon," he said.
Office of Management and Budget Director Mitchell Daniels Jr. asserted
that oil and gas revenue and confiscated Iraqi assets would provide
abundant resources for reconstruction.
Some members of Congress agree. "I don't think it makes sense to ask U.S.
taxpayers to pay the full cost of rebuilding Iraq when the Iraqi state has
plenty of resources to do so itself," said Sen. Byron L. Dorgan (D-N.D.),
who introduced a resolution Thursday calling for the use of oil proceeds
to finance the rebuilding effort.
However, Bush administration officials have declined to make specific
estimates of the long-term costs of rebuilding Iraq.
Without question, Iraq possesses assets any country would covet.
It sits atop the world's second-biggest pool of proven oil reserves, some
112 billion barrels, as well as huge deposits of natural gas and petroleum
yet to be discovered.
But wealth in the ground does not necessarily translate into money in the
bank, at least not immediately. Iraq's oil infrastructure has deteriorated
badly during Hussein's reign, and most experts say it would take up to two
years and $5 billion to restore production to its pre-Gulf War level.
Estimates of Iraq's potential oil earnings during the first year or two
after the war range from about $15 billion to $20 billion, depending on
price and production assumptions.
From that income, at least $11 billion would be needed initially for
routine government spending on state employees' salaries, public health,
safety, education, agriculture and welfare programs, Sandi said.
That would leave $4 billion to $9 billion to finance repairs,
infrastructure development, humanitarian assistance, debt payments, claim
settlements and war reparations.
And that's where the numbers stop making sense.
Estimates of Iraq's reconstruction needs start at about $25 billion and
run as high as $100 billion. The Council on Foreign Relations predicts
that reconstruction will consume about $20 billion a year for several
Iraq's external debt - loans from foreign countries and international
creditors - totals at least $60 billion and as much as $130 billion.
Sandi, who has contacted a number of governments to discuss Iraq's
financial situation, said his best estimate is about $115 billion.
At 10% interest, as low a rate as indebted countries can expect to pay,
Iraq's interest payments alone could cost more than $10 billion a year.
Iraq also faces thousands of compensation claims totaling more than $200
Nearly $100 billion is being sought by Iran as a result of the eight-year
war instigated by Hussein.
As well, many claims were filed by Kuwaiti interests in connection with
the 1990 invasion that triggered the Gulf War.
The United Nations, which is arbitrating a portion of the claims, already
is deducting about $4 billion a year from Iraq's oil revenue to pay
claimants. If the rest of the pending claims were resolved, the payments
could increase substantially.
In addition, Russia, France, China and several other countries have signed
contracts with Iraq totaling about $60 billion. Russia, in particular, is
insisting that a new Iraqi government must honor those deals.
Iraq's debt burden is several times the size of its entire economy, which
means it is more heavily leveraged than most of the countries qualifying
for the World Bank's Third World debt relief program. Its financial
obligations amount to more than $16,000 for every man, woman and child in
Iraq, a country whose per capita gross domestic product has fallen to
A number of economists say the only practical solution is for creditor
countries and commercial lenders to write off a substantial portion of the
debt, perhaps as much as 80%, and to allow a moratorium on all payments
and reparations for five years or so after the war. The United States and
other members of the Paris Club creditor group did that for Yugoslavia
after the war in Kosovo in 2001.
"There's a very good argument for a massive restructuring or writing off
of debt," said Crocker, of the Center for Strategic & International
Studies. "The international community has certainly done that in the past.
The problem is, it needs to be dealt with now. This is not a longer-term
issue. The minute Saddam is gone, people are going to start demanding the
The United States may be reluctant to take the lead on debt relief.
Not only would it focus attention on the substantial costs associated with
the war effort, it would require asking Russia, France, Saudi Arabia and
other war skeptics to swallow a disproportionately large share of the debt
"It's going to be hard for them to say, 'OK, Iraq, you don't have to pay
your debts,' especially when they're insisting that everyone else has to
pay all their debts all of the time," said Baker, of the Center for
Economic and Policy Research.
Philip K. Verleger Jr., an energy economist and senior fellow at the
Council on Foreign Relations, said Iraq's postwar financial stability -
and the United States' future expense tab - would depend in large part on
the Saudis, who hold $25 billion of Iraq's external debt.
Any increase in Iraqi oil output is likely to drive down oil prices,
currently about $29 a barrel, unless the Saudis are willing to throttle
back their own production to keep supply and demand in sync, Verleger
said. Whether they would be willing to do so is an open question.
"Most calculations suggest that if Saudi Arabia does not cut production
and we put the Iraqi oil back in the market, we're going to be dealing
with a price back in the teens," Verleger said. "If the Saudis so choose,
they can make life very, very difficult and very, very expensive for the
But Sandi, the investment banker, said it is only fair for foreign
creditors to wipe the slate clean so Iraq doesn't suffer the same
financial fate as Germany after World War I, when crushing debts and
hyper-inflation helped set the stage for World War II.
"The whole world knows they gave that money to Saddam. The international
community has to come together and discharge Iraq's debt, if not all of
it, then at least a portion," said Sandi, who is circulating a "Phoenix
Plan" for repairing Iraq's economy.
"Why? To have a good neighbor, a peaceful neighbor, a stable neighbor.
It's a good price to pay, I think."